Playing Both Sides: Branded Sales, Generic Drugs, and Antitrust Policy

Abstract

The issue of high drug prices has recently exploded into public consciousness. And while many potential explanations have been offered, one has avoided scrutiny. Why has the growth in generic drugs not resulted in lower drug prices?

In this article, we explore a phenomenon we call “playing both sides”: companies that participate in pharmaceutical markets as both brand owners and generics. We hypothesize that companies that earn a significant amount of their revenue from patented drugs may have less incentive to aggressively pursue a generic agenda, since patented drugs generate far more revenue for firms than generic drugs do.

To investigate this phenomenon, we built a comprehensive database of all major pharmaceutical companies, evaluating where their revenue comes from, how that has changed over time, and how it relates to their behavior in court. Despite broad industry trends toward specialization, about one third of the firms we study have opted for a mixed business model over time. And those firms behave differently than pure generic firms. Our data show that when companies with significant generic sales play both sides, they behave differently than firms with a purer generic revenue stream. Dollar for dollar, the pure generic firms in our study challenged more patents as invalid or not infringed than the mixed firms. Further, “mixed generic” companies with growing brand sales (or a growing share of their revenue from brand sales) are more likely to settle the patent challenges they bring; companies with growing generic share are less likely to settle and more likely to take those cases to judgment. And when they do go to judgment, patent challengers with a greater generic share are more likely to win those challenges while companies with higher brand sales are less likely to win.

In short, we find evidence to support the hypothesis that generic companies that make more of their revenue from patented drugs are less likely to pursue challenges to judgment and less likely to win when they do. Playing both sides may reduce the incentive of generic challengers to fight as hard as possible to win the case before them. That may be especially true of the sorts of challenges that affect not just the patent in the instant case but might change legal doctrines that may ultimately hurt the generic challenger’s brand business.

Our article’s findings suggest a more nuanced antitrust analysis of mergers involving generic companies and patent settlements in which generics delay entering the market. In challenging more patents, settling fewer cases by agreeing to delay entry, and winning more of the cases they do bring, pure generic companies promise to unleash the generic competition that they were intended to. In the wide-ranging effort to lower drug prices, we must pay attention not only to whether a drug is patented but also to who is, or is not, challenging that patent and why.

Keywords: antitrust, mergers, pharmaceuticals, empirical studies, generics

JEL Classification: I18, K21, L40, L41, L43, L65, O34, O38